Ecopetrol SA (EC) 2013 Q2 法說會逐字稿

Welcome to the second-quarter 2013 Ecopetrol SA earnings conference call.

My name is Hilda and I will be your operator for today.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I will now turn the call over to Mr. Alejandro Giraldo, Director of Investor Relations Officer.

Mr. Giraldo, you may begin.

Good morning, everyone, and welcome to Ecopetrol's second-quarter 2013 earnings conference call and webcast.

Before we begin it is important to mention that the comments by Ecopetrol's senior management could include projections of the Company's future performance.

These projections do not constitute any commitment as to future results, nor do they take into account risks or uncertainties that could develop.

As a result, Ecopetrol assumes no responsibility in the event that future results are different from the projections on the conference call.

The call will be led by Mr. Javier Gutierrez, CEO of Ecopetrol.

Also participating will be Mr. Hector Manosalva, Executive Vice President of Upstream; Mr. Pedro Rosales, Executive VP for Downstream; Mrs.

Adriana Echeverri, VP of Growth and Strategy; Mr. Camilo Marulanda, CEO of Cenit; Mr. Enrique Velasquez, VP of Exploration; and Mr. Alberto Vargas, Financial Controller.

I will now turn the call to Mr. Gutierrez.

Thanks, Alejandro.

Good morning to all the participants in our conference call today.

Initially we will present the highlights of the second quarter of 2013 followed by the key results of each business segment.

Then we will review our financial results and the internal consolidation initiatives.

Finally, we will present the outlook for the third quarter of 2013.

Following the presentations we will have a Q&A session.

So let's start with slide five to review our milestones in the second quarter of 2013.

In the second quarter of 2013 our company continued its growing path, proving once again the strength of this strategy and resilience of the organization to face the changes in the environment such as lower crude oil prices, the limited transport capacity, and the unrest of communities affecting the operations of some fields.

Additionally, the price of our share fell in line with the downward trend of most emerging capital markets.

I highlight the following results.

In Exploration, we announced a discovery, Cusuco 1 in Block CPO-10 in Meta province.

Ecopetrol holds 100% interest in this block.

The well produced crude oil of 13.8 grade API with a water cut of 4%.

With this Ecopetrol added up three discoveries in 2013, showing an exploratory success of 75%.

Also, we submitted the most competitive bids for three mature blocks in the 11th round in Brazil and we acquired 31.5% of the prospect Gunflint in the US Gulf of Mexico.

In Production, I highlight the growth above 10% in the main fields of the Llanos channels region in Magdalena valley.

Regarding Transport, with the signing of contracts between Cenit and Ecopetrol on April 1 we began a new era in the business model of this segment which will bring significant benefits for our company and for the oil industry in Colombia.

As a result of this new business model, we are paying higher tariffs in the main pipelines which will be offset by the future net income and dividends from Cenit to Ecopetrol.

Additionally, the regular line construction of the Oleoducto Bicentenario was completed.

On Refining, we had higher reliability and we advanced in the modernization project of Reficar.

The financial results were in line with increase in heavy crude production, lower oil prices, and cost increases mainly by the new transport scheme.

As I mentioned, this transport model will generate higher profits and benefits for Ecopetrol.

Additionally, we advance our cost control initiatives mainly related to workovers, energy consumption, supply, and maintenance of refineries.

Another important development was a new loan agreement for COP1.8 trillion of which COP1.5 trillion were used for liability management purposes, substituting the previous syndicated loan obligation, extending the term by five years, and reducing the interest rate by 1.5%.

As part of this transaction we also raised COP284 billion to finance our investment plan.

Additionally, Standard & Poor's upgraded the Company's rating in international currency from BBB- to BBB.

In [HSE] we continued that sustained frame of improvement within the industry standards.

In conclusion, I refer that we maintain the goals of the year 2013 with our sustained growth dynamic implementing the initiatives and measures to mitigate the risk of the environment and maintaining a moderate cost increase.

Please move on to slide seven to review our CapEx in the first half of 2013.

CapEx deployed in the first half of 2013 amounted to $3.2 billion allocated as follows -- 50% to production, mainly for the construction of facilities at Castilla and Chichimene fields; 30% to subsidiaries that involves resources for the modernization project of the Cartagena refinery; 10.5% to transport to be used for the San Fernando-Monterrey pipeline and projects in the Mid-Magdalena region; and the remaining 9.5% to exploration, refining, and other projects.

Now I turn the conference to Enrique Velasquez who will comment about the main results of our E&P segment.

Please let's move on next slide which summarizes the highlights of Exploration.

During the second quarter Ecopetrol completed the work at Cusuco 1 located in the Block CPO-10 which (inaudible) hydrocarbons and becomes the third successful A3 well of this year.

Originally during the quarter four stratigraphic tests and eight appraisal wells were drilled.

Hocol drilled exploratory well Godric, which by the end of the quarter was under evaluation and also drilled one stratigraphic well.

Regarding international activity, it is important to mention that Ecopetrol America Inc.

acquired 31.5% interest of BP in the Gunflint discovery located in the US Gulf of Mexico.

On the other hand, Ecopetrol Oleo e Gas Do Brasil participated in the 11th bid round held by the ANP in Brazil.

In this bid round we submitted the most competitive bids in the Blocks Potiguar M-567 and Foz de Amazonas M-320 with our working interest of 100% and in the Block Ceara M-715 with a working interest of 50% in association with Chevron Brasil.

Let's move to the next slide which summarizes the highlight for Production.

During the first semester of this year the corporate group gross production reached 785,000 barrels of oil equivalent per day.

This is a 4.3% increase compared with the same period of last year.

In the second quarter the corporate group achieved a gross production of 778,000 barrels of oil equivalent per day, a 2% increase compared with the same quarter of the year 2012.

It is worth to mention that even though the production decrease compared to the first quarter of the year 2015 the production is aligned with the plan set for this year.

The production growth was led mainly by the increase in Chichimene and Castilla fields operated by Ecopetrol and Rubiales and Quifa fields operated by partners.

Now in the next slide we will review the main results for the Transportation segment.

Thank you, Enrique.

Let's start with our operating results.

During the second quarter the volumes transported increased by 3.1% as compared to the same period of 2012 reaching 1.184 million barrels per day, mainly due to the increase in the transported volumes by our subsidiaries, Ocensa and Oleoducto de Colombia.

The construction of the phase one of the Bicentenario Pipeline had an important advance during the quarter.

In addition, in line with our growth plans, we highlight the expansion by 41,000 barrels per day in Oleoducto de Colombia starting in March 2013, growing from a capacity of 195,000 barrels per day to 236,000 barrels per day.

Regarding Cenit, on April 1 the Company started its operations under the new transport model of the Ecopetrol Group in which the Company will focus in the operation and maintenance activities and the development of the investment plans for this segment.

To regulate this activity several agreements have been signed by Ecopetrol and Cenit, amongst which we can highlight the crude oil and product transportation, the operation and the maintenance, and the project development agreements.

Let's see some more facts about Cenit in the next slide.

As we were pointing out, from now on there is a clear separation in the activities executed by each company in which the commercial and planning functions move from Ecopetrol to Cenit and Ecopetrol becomes, as with all other producers and distributors in the country, another client of the oil and products pipeline under clear rules and contracts.

Cenit, on the other hand, assumes the role of commerce analyzing and planning the transportation of crude oil and products as well as the responsibility of operating and maintaining the systems as well as its financial and strategic management.

From a financial perspective, the revenues from third parties derived from the transportation services disappear from the individual financial statements of Ecopetrol.

And as a consequence of this, it starts registering a cost of transportation charged by Cenit, which are based on the transportation agreements mentioned beforehand under ship-or-pay and ship-and-pay principles and the tariffs regulated by the Ministry of Mines and Energy and CREE.

The results of this activity which was before registered as an intersegment activity within Ecopetrol is now registered via proceeds and dividends distributed by Cenit to Ecopetrol.

Starting April 1, Cenit assumed the responsibility of managing and financing the current and future projects related to the development of the transportation infrastructure under clear profitability criteria.

Finally, with the creation of Cenit we will ensure clear market rules by separating the roles of Ecopetrol as an owner, planner, operator, and user of the systems.

Cenit will operate with an open model in which all interest parties will have the possibility to access the transportation infrastructure.

I now hand over to Pedro Rosales who will comment on the Downstream results.

Thanks, Tomas.

Please go to slide number 12.

In the second quarter of 2013 the throughput of Barrancabermeja refinery increased by 1,600 barrels per day because of lower scheduled maintenance activities than those in the same period of 2012.

The throughput of Cartagena refinery decreased by 600 barrels per day compared to the second quarter of 2012 as a result of less availability of light crude oil.

In Barrancabermeja refinery gross margin for the second quarter of 2013 was lower than the figure for the same period of 2012 by $1.40 per barrel due to lower gasoline and diesel yields costs by processing heavier crudes given the lower availability of light crude oil.

In addition, the international crack spreads for medium commercial refineries were lower.

Cartagena refinery exhibited the same trend in gross margin with a decrease of $1.90 per barrel due to a higher cost of light and medium crude oil processed and the lower international crack spreads.

Regarding our major projects, we close the second quarter of 2013 with 16% progress in the modernization Barrancabermeja refinery and 74% progress in the utility's master plan.

The expansion and modernization of Cartagena refinery reached an 83% progress discriminated by detailed engineering 100%, purchases 99.2%, modules 100%, and construction, which began in October 2011, is at 56.7%.

It is important to mention that the operation of our refineries remained stable during the period reaching a utilization factor of 84%.

Let's see slide 13 to review the results of the supply and marketing area.

Our volumes sold increased by 50,000 barrels per day, mainly due to higher availability of crude oil volumes for both domestic and export sales.

Our exports grew by 32,000 barrels per day as a result of increased production and utilization of inventory.

Also fuel oils exports increased because of a higher production in Barrancabermeja refinery as a result of the processing of heavier crude oil.

In line with international price trends, the value of our basket of crude oil and products decreased.

The price of our crude basket also reflects lower domestic sales prices due to weakening of the international index of fuel oil, which is the index for crudes sold in the local market as component for marine fuels.

In addition, it is important to mention that the share of heavy crude oils in our export basket increased from 75% to 88% between the second quarter of 2012 and the second quarter of 2013.

The main reference for our international sales was Brent with 58% followed by Maya index with 42%.

The main destination of our crude exports was the US Gulf Coast.

I highlight the increased sales to Asia where we delivered 34% of the exports of crude oil and 54% of products, mainly fuel oil.

Now let's go to the next slide to comment about the financial results of Ecopetrol.

Thanks, Pedro.

Please, let's turn to the next slide.

Our total revenues rose 3.4% in the second quarter of 2013 when compared with the same period of 2012, mainly due to higher sales volume of crude oil which offset the fall of 6.2% in the average sales price.

This decrease is explained by the weakening of the international price benchmarks, Brent and Maya, as well as by the higher share of heavy crude oil in our baskets.

Additionally, we booked revenues from exports to India and to the US Gulf of Mexico which were in transit at the end of the first quarter.

Now let's turn to the next slide to review the main financial results in the second quarter of 2013.

Our operational income decreased between the second quarter of 2012 and the same period of 2013 due to a moderate growth in our revenues compared with an increase in the sales costs.

In spite of this situation EBITDA and EBITDA margin were at similar levels as in the second quarter of 2012.

It is important to emphasize that starting this quarter the EBITDA is estimated based on net income according to the standards of the SEC.

The lower net income drove to lower returns on assets and equity.

However, they are still very competitive when compared to the average of the oil and gas industry.

Now let's turn to the next slide to review in detail the P&L statement of Ecopetrol.

As previously mentioned, our revenues grew 3.4% due to the following reasons.

First, the higher sales volume sold and, second, the positive effect of the exchange rate evaluation on exports which offset the lower average sales price in the second quarter of this year.

Regarding costs, variable costs rose by 15%, mainly due to the implementation of a new profit scheme in the Transportation segment and the higher trucked volumes of diluent and heavy crude.

Starting 2013 we are paying higher tariffs in the main pipelines due to the new profit business model.

However, such costs will be offset by the future dividends from Cenit.

Also, we had higher costs of amortization and depletion in the second quarter of this year due to higher capitalizations and production in Rubiales, Chichimene, and Quifa fields.

On the other hand, fixed costs also rose 20% due to the following.

First, higher contracted services of greater subsoil activity, mainly from the commerciality of the [Cajua] and Nare fields, water volume's management, and higher bottom sediments and water cart primarily at the Rubiales and Quifa fields.

Second, the rising lease, technology, and surveillance contracted services.

Third, maintenance on the transportation infrastructure as part of the integrity program launched in 2012 and which will last until year 2016, and well workovers at the Chichimene and Castillas fields.

Fourth, the charge coming from the recent tax reform starting January of this year by which the value-added tax based on the production of gasoline, diesel, and asphalt is no longer deductible and is now booked as a higher cost.

Regarding the operating expenses, there was an increase mainly due to our lower recognition of income coming from previous quarters when compared with the same quarter of 2012.

Operating income amounted to COP4.9 trillion in the second quarter of this year, equivalent to an operating margin of 32%.

The non-operating result recorded a gain of COP225 billion mainly due to the following.

First, the profit from the divestment of El Dificil, Guarimena, and the Entrerrios fields coming from the portfolio optimization initiative.

Second, improved results of subsidiaries accounted under the equity method which went from a loss of COP33 billion in the second quarter of 2012 to a profit of COP280 billion in the second quarter of this year.

Those gains offset the loss in portfolio investments during the second quarter 2013 due to the adverse global financial market conditions.

The increase in income tax expenditure in the second quarter of 2013 compared to the same quarter of 2012 is mainly due to the adjustment made in the second quarter of this year to recognize the six-month rate of that CREE tax created by the tax reform of 2012.

As a result of this adjustment the tax provision was registered at 37% in the second quarter of this year.

However, the effective tax rate of the first half of 2013 is 35%.

Finally, the net income amounted to COP3.3 trillion, equivalent to a net margin of 21%.

EBITDA was COP7.3 trillion equivalent to an EBITDA margin of 48%.

Let's go now to the next slide to see more detail on the key initiatives addressed to optimize the cost of operations.

Our main initiatives to control the costs are the following.

In E&P with the building of a power transmission line to the Rubiales and Quifa fields, the optimization of fluids disposal, and the higher reliability and efficiency of subsoil and facility maintenance we forecast the lifting cost by year-end will reach between $10.68 and $10.85 per barrel equivalent compared to a cost of $11.53 in 2012.

In refining and petrochemicals we plan to keep advancing our strategies to optimize the costs of chemicals and catalysts with maintenance reliability and providing efficient industrial services.

With these initiatives we estimate that refining costs in 2013 to be in a range of between $6.33 and $6.69 per barrel compared to $6.03 per barrel reported in 2012.

On the next slide we present Ecopetrol's cash flow and balance sheet as of June 30, 2013.

The initial cash balance on the second quarter was COP8.6 trillion.

Internal cash generation and other sources added COP16.8 trillion that funded the operation, the CapEx, and the payment of dividends in a single installment to minority shareholders, as well as the first installment of ordinary dividends to the Colombian government.

The ending balance of cash and cash investments was COP4.2 trillion.

Ecopetrol signed a new loan agreement for COP1.84 trillion, of which COP1.55 trillion were used for liability management prepaying a syndicated loan disbursed back in 2009.

With this new loan we extended the term in five years and reduced the interest rate by 1.5%.

Additionally, we raised COP284 billion for financing this year's investment plan.

Despite this transaction, the indebtedness through this period remained low with our 12-month debt to EBITDA ratio of 0.22 times.

Additionally, during the second quarter of this year S&P rose Ecopetrol's credit rating in foreign currency from BBB- to BBB.

On the next slide we have an overview of the financial results of the corporate group.

Revenues of the corporate group amounted to COP17.6 trillion with a net income of COP3.4 trillion.

EBITDA was COP7.5 trillion and the EBITDA margin was 43%.

In the second quarter of 2013 the Transportation segment subsidiaries outperformed given that Ocensa and Oleoducto de Colombia operated as a profit center for the entire second quarter.

Reficar had a lower loss, while results of E&P companies were lower mainly due to Ecopetrol global energy losses and the decreased net income of Hocol.

The higher revenues without eliminations came from Reficar with COP1.9 trillion, followed by Cenit with COP636 billion.

The higher EBITDA, net of noncontrolling interest, came from Ocensa with COP423 billion, followed by Cenit with COP397.

The higher net income came from with Ocensa with COP370 billion, Cenit with COP289 billion and Equion with COP190 billion.

On the other hand, the bigger losses were reported by Ecopetrol Oleo e Gas Do Brasil with COP112 billion, Ecopetrol America with COP84 billion, and Reficar with COP46 billion.

Now I will turn the presentation back to Mr. Gutierrez who will comment on the milestones in the internal consolidation and the corporate social responsibility.

Thank you.

Please go to the next slide.

The accident frequency rate in the second quarter of 2013 was 0.72 accidents per million worked hours, a remarkable 40% lower than in the same quarter of the last year.

We also reduced the number of environmental incidents from operational causes, falling from 11 in the second quarter of 2012 to five in the same quarter of 2013.

Finally, during the second quarter of 2013 we were awarded two patents, one in Colombia and one in Mexico, which amounted to four industrial property rights to Ecopetrol in 2013.

Additionally, it is worth to highlight the public hearing the city of attended by more than 1,200 people as well as meetings with stakeholders in 10 municipalities in Colombia.

Now we will present the outlook for the third quarter of 2013.

Please go to the next slide.

In Exploration Ecopetrol will drill three exploratory and five stratigraphic wells.

Internationally one A3 and one A1 wells will be drilled.

Regarding Production, we will continue with our development plans in order to reach the 2013 target.

About Refining, we will keep the pace of the construction in the modernization project of Cartagena to achieve above 70% advance in this part of the project at the end of the third quarter.

Also, in the Barrancabermeja refinery a revamping of the new 250 crude unit will be made causing a scheduled turnaround of 84 days in this plant.

In Transportation, we expect to start operation and the line fill of Oleoducto Bicentenario in the third quarter.

Also capacity of Oleoducto Transandino will be increased by 25,000 barrels per day.

In summary, in despite of difficulties we expect to move forward at a good pace in the delivering of our key projects to accomplish the goals of the year 2013.

Now I opened the session to questions from our participants.

(Operator Instructions) Frank McGann, Bank of America.

Good day and thank you very much for the call.

In terms of production, and I know you have confirmed your targets for the year, but I was wondering how much higher would production potentially have been in the second quarter if you had not had any disruptions on pipelines?

And following on that, if you were to have no disruptions at all is it possible that the target for the full year could potentially be higher?

If I can get through that one question, then I was just wondering, in terms of the community interest in production in the future or the way the royalty structure has been -- your distribution has changed.

I know that has no direct effect on you, but my understanding from talking to other companies is that the interest in oil developments going forward is going to be the community interest may not have any direct impact in terms of royalties.

But there may be certain requirements or negotiated interest in projects going forward that may end up having some effect on company finances.

I don't know if that would directly affect Ecopetrol itself, but I was wondering if you might be seeing greater requirements that are being -- or commitments being asked for for education or for hospitals or roads or whatever it might be that might affect finances going forward.

Thank you, Frank.

In relation with the production, we keep our projection of 798,000 barrels per day basically is our current numbers.

In relation with the impact of the new distribution of the royalties law, yes, you are right.

But it is very much important to mention that most of the places in which we are operating we have been trying to deliver [transfer] relation with the communities for us is very much important.

The relation and the fulfillment of our commitments with the different group of interest.

Additionally, maybe you have not, I am absolutely sure that we have been increasing our investment, our social investment, but our relation with the communities are mainly supported in that daily current relations with the communities also with the local authorities.

But at the same time we are conscious that we must work to try to help the communities to manage the impact of the new distribution of the (inaudible) law in the revenues for the communities and the villages in which we have the production because they are going to receive less money than in the past.

But we are not going to replace the government in that sense indeed.

We are going to replace the money that was generated in the previous conditions, but anyway we continue with the plans we have in the past.

For example, maybe (inaudible) in our investment the last year in terms of the social investment was around $160 million in pesos the number COP304 billion that is more or less equivalent to $160 million.

And we are mainly concentrated in basically three lines.

We dedicate resources in a priority of education and culture and, second, to the productive projects but also to the structure like roads, public services for example.

And, finally, we also dedicate some resources to the strengthening of the institutionality in the different places in which we are developing our operations.

Additionally, maybe it is important to mention that as part of the activities of our Board of Directors we have been developing monthly meetings with the states or departamentos, how we say it in the organization or the country.

They are coordinated by the members of our Board of Directors.

Amylkar Acosta that is the representative of the states in the Board of Directors and which we have been coordinating with them different plans.

Additionally, we have dedicated some resources for the majority of some of the initiatives that the different states have in line to obtain resources from the royalties forms in the different regions of the country.

This is the way in which we have been working after the approval, the application, implementation of the new distribution royalties law.

That is the way in which we have been acting in that sense.

I don't know if you have any additional requirement in that light.

What I don't know if one of my colleagues want to mention anything about -- okay.

Paula Kovarsky, Itau BBA.

Hi, good morning.

I have a couple of questions here.

The first one is a quick follow-up on the previous question, so if you could just share with us what was the impact of the unrest in communities and the effects to pipelines to this quarter's production number.

Then following up on that as well, I was just working the numbers here and for you to be able to deliver the 798,000 barrels per day production guidance production in the second half of 2013 would have to grow something like 16% over the first half.

So if you could again perhaps share with us where or from which fields do you believe this production growth may come.

Then the other question relates to the lifting costs, which went up significantly compared to the previous quarter.

I mean it looks like lifting costs went up more than the relative drop in production.

So if you could also detail a little bit more what happened to the costs and how exactly do you intend to lower those numbers in the coming quarters.

Thank you, Paula.

I am going to present the numbers of the impacts of the different items in the production.

Please, yes -- Alberto, you are going to refer?

Yes, the first one; what was the impacts of pipelines in the social events, please.

Okay.

Okay, yes.

Which are the impacts in the production?

Paula, thank you for the question.

The impact on the tax on pipelines for the second quarter meant 8.3 [kbpd] less production compared with what we had forecasted.

It means like 1.5 [kbls] in total that is the number.

Also for social issues the impact 10.5 [kbpds].

Did you want to mention (multiple speakers)?

Okay.

Enrique Velasquez is going to refer to the production; what are the tools that expect to increase the production.

Enrique?

Hi, Paula.

Good morning.

Regarding your second question, which fields will allow us to meet the goal, I would say that Rubiales, Castillas, Chichimene, Guajira [gas] equivalent, and Quifa.

Those are the fields which would be responsible in order to maintain the production and meet the goal.

There are some not as big as the ones that I mentioned, but also are important and I would like to mention a couple of them.

One is Casabe and the other one is La Cira.

Let me put it in context to you in order to have your numbers.

For instance, Rubiales.

Rubiales production for the second quarter actual numbers is 121,000 barrels per day and Castillas the real number, the actual number is 114,000 and we expect to produce 122,000 barrels per day.

Chichimene; Chichimene actual number for second quarter is around 39,700 barrels per day and we expect to produce 71,000 barrels of oil per day.

So in that sense you can see that those increase are important and with the numbers we can achieve the goal.

Paula, this is Alejandro.

I am going to take the question number three on lifting costs.

So, first of all, take into consideration that definitely the driver for increasing lifting costs has been the higher production of heavy crudes.

12 months ago the share of heavy crudes was 50% of our total production.

Currently, we are talking about 57%.

This is a continuing trend and, of course, it is having an effect on cost.

Specifically the drivers for the higher cost are three.

Number one is the management and the disposal of water; number two are the well workovers; and number three is the windfall profit clause on new contracts.

Basically that explains $1 of increase in the lifting costs compared to last year.

Now going forward, as we mentioned in the report, we have cost control initiatives specifically for E&P.

And to give you some guidance for this year we expect we should be in a range of $10.60 to $10.80 per barrel, given the initiatives we have and maintenance of wells as well as infrastructure, electricity consumption, and number three is everything related to operations.

So we should be in that range of $10.60 to $10.80.

Anyway, keep in mind as Adriana mentioned in the Spanish call, the lifting cost of Ecopetrol continues to be, I would say, in line or even low compared to peers similar to a competitor.

Christian Audi, Santander.

Just to follow up, maybe Alejandro on the topic of costs.

You just talked about lifting costs, but can you share your expectations also in terms of refining and transportation costs outlook?

What you had in the second quarter versus what you expect for the second half of the year?

Okay, in terms of -- and do you have any other questions or only the lifting costs?

(technical difficulty) How is the environmental license process going?

Did you feel any improvement in the second quarter versus the first, or is it the same?

And what is the outlook?

Then lastly, WTI has been moving up quite a lot, number one, and you have (technical difficulty) the spread between?

Christian, I think we lost you on the line.

Could you please repeat the questions number two and number three?

So in terms of production growth can you give us an update in terms of the environmental license situation?

Has it improved, worsened, or stayed the same in the second quarter versus the first and what is your outlook?

The other has to do with your commercial strategy.

WTI prices have been moving up quite a lot and your contracts are linked to Brent.

Are you doing anything differently from a commercial point of view to try to take advantage of this move in WTI?

And if so, what is your expectation of spreads between your prices and WTI prices or Brent prices for the remainder of the year versus what you had in the second quarter?

So I will take the question on cost of transportation, Pedro Rosales will take the question on refining costs --

Environmental.

I take environmental.

Okay.

And Mr. Gutierrez will take the question on environmental and also Pedro Rosales will take the question on the commercial strategy linked to WTI pricing.

So in terms of cost of transportation, we should be in levels between $4 to $5 per barrel for the second half of the year considering and taking into account the new change in tariffs starting this year.

So keep in mind that last year basically our cost were basically based on the cost sharing scheme.

Starting this year now transportation operates as a profit generation center.

This explains mainly the increase in costs.

And now Pedro Rosales will take the question on refining cost.

Okay, thank you.

Christian, for refining costs we have an increase in fixed cost in refining as a result of tax refund made in December 2012, but are priced since 2013 onwards in the treatment of VAT, which in this year cannot be discounted in the purchases made for the production process.

This has an effect in the segment in the first half of about COP75 billion, but an effect that would remain because the reform is for the fiscal year.

But the case, if you exclude these exact operating costs, we remained stable in refining.

We don't have increasing in the cost of our segment.

About what Ecopetrol is doing about our commercial strategy, Ecopetrol ask price proposals referred to different international benchmarks in order to price its exports.

[Among] the criteria used when selecting the proposals are based on the best price for Ecopetrol no matter if index used (inaudible) where the volumes are exported, the liquidity and transparency of the index, and its capacity to reflect demand and other issues at a lower level.

When you compare the second quarter 2013 with the same period in 2012 Ecopetrol has included two indexes in its export price basket, Maya Far East and Maya Europe, both being benchmarks of heavy crude different to US Gulf Coast.

You see these two reflect the strategy of diversifying destinations and it allows Ecopetrol to reflect in [a variable way] the particular performance of the Asian and European markets in the negotiation.

This provides additionally to our clients the confidence that the most liquid benchmarks of the regions are being used.

On the other hand, the Brent and Maya US Gulf Coast continue to have the dominant participation in our basket.

Right now we are having a better perspective in terms of the environmental process for exploration and also for exploitation.

In both areas right now we have better perspective than in the past year.

In particular, in line with the production, basically we are expecting, with our associate Pacific Rubiales, the modification in the environmental for the increase of the water management for the injection.

If we don't obtain in the next month maybe it could affect the production, but we are not expecting impact in our own production.

Right now we have all the permits that we need to guarantee the production in our own fields.

Basically, the risk that we still have is in relation with the modification of the license for the injection in the case of the Pacific Rubiales.

This is basically the situation right now in terms of the production, the [exploitation].

Anish Kapadia, Tudor, Pickering, Holt.

Good afternoon.

I have got a question on -- just going back to the Rubiales field.

Wanted to see what your outlook is for production this year and over the next five years or so?

It's Enrique Velasquez taking the answer about production of Rubiales for this year and the next five years.

Okay, Enrique please.

Good morning.

Regarding your question, we expect the Rubiales field will keep in a steady production of around 120,000 barrels per day.

I would like to mention that the primary [designation] for these fields is quite large so we have to work very hard in order to maintain this production at this present level.

Gustavo Gattass, BTG.

Good afternoon, guys.

I had a couple of questions here.

The first one I wanted to just touch on had to do with reserves and your exploration program.

I was just wondering; we have had a lot of demand discussions and explicit desire from the Company to increase reserves.

Looking at what you are planning to do for this year and looking at the message that has been put out on A2 and A3 wells, it does seem that it has been a less active exploration year than we have seen in the past.

I just wanted to get a feel for you guys with regards to how you are seeing your exploration efforts and the potential to really recoup reserves by the end of the year.

That would be question number one.

The second one I actually wanted to start with was just a thank you note on you guys for breaking out for us the consolidated numbers by business division.

I think that will help a lot down the turn.

But I was wondering if we could have the first-quarter numbers under the same breakdown, as opposed to just only the first half and if that is something you guys could effectively get in the future.

Thank you.

Thank you.

Enrique Velasquez is going to refer to the exploration program for this year.

Good morning.

We already got 15 out of 20 environmental license in order to complete our plan which is to drill 20 wildcats.

So in that sense we feel pretty comfortable to drill the wells that we program.

And regarding your question or (inaudible) how exploration way were incorporating reserves, I would like to mention that our plan for this year is to get commerciality for the discoveries Cana Limon as well as Acacias.

We plan to get it by maybe third quarter of this year.

Our other initiative are no less important is try to the prize the discoveries that we got this year.

As you are aware we have drilled for wells; three of them tested hydrocarbons.

Most of them, the CPO-11 and CPO-10.

So the plan is to appraise those discoveries in order to speed up the process to incorporate reserves through exploration program.

But in relation to reserves, Enrique, maybe it is important to mention additionally that the main part of our reserves this year are coming from our development plans.

Maybe you can refer to it to have a complete view in terms of their reserves this year.

Okay.

Let me elaborate a little more regarding the other way to incorporate (inaudible) which is to increase our recovery factor.

We will continue implementing our infield drilling in our fields.

Also, as you are aware, we are running some pilots in different oilfields so we will keep the plan for infield drilling as well as for water injection, which is at the moment the more outstanding activities for production.

So as Mr. Gutierrez says, we keep our plan in order to incorporate reserves from recovery factor activity.

And in relation with consolidated information for the first quarter, please, Alberto?

Thank you, Gustavo, for your question.

Yes, we can do it.

Of course, we can produce block figures by quarter consolidated, so that is going to take us like from a week to 10 days and we will put it on the web page.

So count on that, okay.

Felipe Santos, JPMorgan.

This is actually Caio Carvalhal.

I had a couple of questions here.

One of them is trying to understand a little bit the relation between crude production and sales volume.

If we look in slide 15 on the presentation and also in historical figures, we see that production and sales follows more or less the same trend.

I know that, of course, the sales volume includes a couple of other things like third-party sales and royalties and this kind of thing.

But my basic question is that I see that was a big disruption in the second quarter where we saw sales volume increasing by 8% while your production decreased by 2%.

I know there is a couple of factors impacting it.

My question on that is specifically on the role of the inventory's variation.

How big was your inventory's variation in this difference?

And if we could expect next quarter to have some correction.

What I mean is basically if we could expect a lower sales volume in relation to production in the third quarter?

So that is my first question.

My second question is a follow-up of the last question from Gustavo, which is basically related to the enhancement oil recovery strategy that you are doing.

I believe that you are doing a pilot in Chichimene, like a test in Chichimene.

I just want to have a little more clarity in terms of some results, specific technological results in terms of how quickly the improvement in the recoverable factor in the average.

I think that the overall recoverable factor is something in the range of 17%, 18%.

Please correct me if I am wrong.

And I would like to know when we would be able to have an idea of how could be the improvement on this percentage.

And these are my questions.

Thank you.

Pedro Rosales is going to refer to the relation between crude production and the sales in which we and the percent evaluation in the second quarter; you asked what we can expect in the next quarters.

Okay.

Thank you, Caio, for the question.

About the sales volume, as you can see in our figures, we divide that sales in two main blocks.

One is the international sales on [oil] and export sales on (inaudible) sales.

About that, as you can see, our volumes increased between 5.6% from the second quarter last year and the impact, as you can see in the figures, is mainly in the national sales.

We increased the sales in [theory].

Let me take the figures.

The sales in volume increased 26,300 barrels per day and in export 32,100 thousand barrels per day.

(inaudible) decrease because of what was mentioned from the [gorilla] tax, the availability of crude for the (inaudible) family was issued this year, but it is the main aspect in the sales in this period.

About the inventories, what happened in this period was that we sell (inaudible) from our inventories and that helps to increase the sales above the production.

Additionally, you must take into account that we purchase crudes and this activity is less this year and then the sales from purchases was reduced compared with the previous period.

The three main aspects in summary is that we use our inventory to increase the sales above the volumes produced.

Additionally, we have less purchases and less sales consider that aspect.

We make a difference valuation between both quarters was 1.5 billion barrels.

In relation with recover factor levels, Enrique is going to refer to.

Regarding your question that the EOI strategy is (inaudible), let me explain to you what is going on.

In the Quifa start, as you are aware, last February we started with ignition of the vessel work.

We will see results no earlier than the third quarter of next year, 2014.

Regarding the chemicals in San Francisco, (inaudible) we will start the injection of chemicals by October of this year.

And the Chichimene [EUR] pilot we are already drilling the wells and now we are building up the infrastructure in order to start the pileups.

So with one injection we started the different well injection programs in different fields.

Maybe the most important are Chichimene, (inaudible) and we plan by the last quarter of this year to start a well injection in Provincia which located in the Middle Magdalena Valley and (inaudible), those fields are in the Upper Magdalena Valley.

Regarding your question about the increase of the recovery factor, let me tell you that we are all in place, (inaudible) now is hired, so the recovery factor of 18% remain with the same figure.

We will release information as soon as we see the results for the initiatives that I mentioned to you.

At this moment we have no further questions in queue.

I would like to turn the meeting back over to Mr. Giraldo for any closing remarks.

Thank you all for your participation.

For any additional questions you can contact Investor Relations and have a good day.

Bye, thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.